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Thursday, 7 July, 2016

Structuring UK Property Investments Through Luxembourg

Following a change in UK law in 2015, it has become harder for non-UK residents to make tax-efficient investments in UK property. Luxembourg offers a solution, providing opportunities to invest in UK residential property and, to a certain extent, commercial property.

Introduction of a capital gains tax on non-UK residents who dispose of UK residential properties

The UK’s Finance Act 2015 (the Act) introduced a capital gains tax (CGT) on the disposal of residential property by non-resident individuals (a rate of 18% or 28%), trustees (a rate of 28%), closely held companies (a rate of 20%) and funds that are not widely marketed (a rate of 20%). Closely held companies are legal entities controlled by five or fewer persons.

Under the Act, residential property is deemed to be land and property used or suitable for use as a dwelling. It includes property in the course of construction, converted to a dwelling and off-plan. It can be owner-occupied or let to tenants.

In the past, many UK residential property acquisitions were made by offshore companies. Since gains made on the sale of such properties are now subject to CGT, investors are looking for alternatives.

No change to capital gains on the disposal of commercial property

The Act does not change the position for commercial property. Capital gains realised on the sale of commercial property remain exempt if the property is considered to be an investment asset.

The exemption does not apply if the property has been acquired as part of trading activity. This includes the material redevelopment of the property or if, at the time of purchase, the investor has the sole intention to sell the property within a year.

a reduction in the taxable rental profit (through deductible expenses)

an interest deduction in the UK on debt financing provided by the bank

a tax-free exit

These objectives can be realised by using a Luxembourg holding company (Luxco). Luxco incorporates a UK subsidiary, which in turn acquires the UK residential property. In certain circumstances, this structure may also apply to UK commercial property. This results in the following benefits:

The rental income of the UK subsidiary is reduced by its operational expenses and interest on debt financing.

Dividend distributions by the UK subsidiary to Luxco are exempt from withholding tax.

Dividend income received by Luxco is exempt from tax in Luxembourg.

Instead of a direct sale of the property in the future, Luxco sells the shares of the UK subsidiary. By virtue of the exit provisions of the Luxembourg–UK tax treaty, the capital gain on the sale of the shares is tax exempt in both the UK and Luxembourg.

By selling shares in the UK subsidiary (instead of the property itself), the sale will be subject to UK stamp duty instead of stamp duty land tax. This reduces the UK tax liability from a maximum rate of 15% on residential property and 4% on commercial property to a rate of 0.5%.

If Luxco is owned by a UK non-domiciled tax resident, Luxco’s profits should be exempt from tax in the UK provided they are not remitted to the UK.

Instead of using a traditional Luxembourg holding company, investors can opt to use a standalone Luxembourg securitisation vehicle (SV).

Regardless of the SV’s legal form, its capital can consist of several compartments with segregated classes of assets and liabilities, which may be liquidated separately. This means investors have the choice of setting up a new SV or using a new compartment in an existing SV.

The SV is a fully taxable entity but all commitments paid to its investors (dividends to shareholders and interest to bond or note holders) are tax deductible. In practice, this means income received is tax-free. Further, no Luxembourg withholding tax applies on dividend distributions and interest payments.

To the extent any tax liability may arise, the SV can apply the Luxembourg-UK tax treaty and EU directive provisions.

For bond or note holders acting as creditors the SV provides confidentiality, although this does not apply if the holders are shareholders.

How can Vistra help?

Vistra is a global independent provider of trust & fiduciary, corporate, fund, marine & aviation, family office, and business & outsourcing services. It is present in 39 jurisdictions (46 offices) in Asia, Europe, the Caribbean, and the Pacific and Indian Oceans. Vistra is the fastest growing corporate services group, now ranking within the top three globally.

Luxembourg’s Vistra Fund Services received the award for ‘Fund Formation & Administration Firm of the Year’ at the International Fund Awards 2014.

The Luxembourg office has a specialised fund service department, which can help you set up funds and SVs in Luxembourg and provide you with all the necessary administrative services. We also have our own SV platform, offering you compartments in existing Luxembourg SVs. Working alongside our UK office, we provide a complete service for investments into the UK via Luxembourg vehicles.

For further information, please do not hesitate to contact Wim, Freddy or Jan.

*This article has been prepared by Vistra Luxembourg for general information only. Vistra does not provide tax advice and suggests you contact your tax advisors. Vistra does not accept responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this article.